Rio Tinto Services Limited v Commissioner of Taxation

REASONS FOR JUDGMENT (Ex tempore - Revised from transcript) 1 Rio Tinto Services Limited ("Rio Tinto") appeals from a decision of this Court dismissing its claim to credits for GST it paid for acquisitions relating to the supply of residential premises by Hamersley Iron Pty Ltd ("Hamersley") in the remote Pilbara region in Western Australia where Hamersley conducts mining operations. Rio Tinto is the representative member for the Rio Tinto Limited GST group which includes Hamersley, and Pilbara Iron Company (Services) Pty Ltd ("PICS"). The A New Tax System (Goods and Services Tax) Act 1999 (Cth) ("GST Act") treats the group as if it were a single entity with Rio Tinto being entitled to the input tax credits on creditable acquisitions made by Hamersley and PICS: GST Act, s 48-45(1). 2 The issue in the appeal, as it was before her Honour at first instance, is whether Rio Tinto is entitled to credits for the GST paid on the acquisitions made by the members of the group in relation to the supply of residential accommodation to employees, contractors and ancillary service providers in the remote Pilbara region. Rio Tinto contends that GST was paid on acquisitions by Hamersley and PICS in connection with the provision of residential accommodation to which the group is entitled to credits. The Commissioner contends, as her Honour held, that credits were denied to Rio Tinto by operation of s 11-15(2)(a) of the GST Act. 3 The general scheme of the GST Act is to impose tax upon the supply of goods and services. The burden of the tax is designed to fall upon the ultimate consumer by a system of invoice-based credits: see HP Mercantile Pty Ltd v Commissioner of Taxation (2005) 143 FCR 553, 557 [13]; Graeme Cooper and Richard Vann, "Implementing the Goods and Services Tax" (1999) 21 Sydney Law Review 337, 347-8. The Australian GST is a multi-staged tax in the sense that it is imposed on every supply of goods and services (unless it is GST-free or input taxed) but, generally speaking, each supplier in the chain will be entitled to a credit for the GST imposed upon the preceding supply until the final supply to the consumer who is not entitled to a credit. The supply of some goods and services, however, is treated differently. Some supplies are GST free and some are input taxed. The latter effectively treat the business purchaser who supplies goods and services to others as if the business purchaser was the consumer of the goods and services. The final supply of goods and services which are input taxed is not subject to GST but the supplier will be entitled to credits except to the extent that the acquisitions related to supplies that would be input taxed: see s 11-15(2)(a) and HP Mercantile at [46] and [50]. In this case Rio Tinto supplied premises that were input taxed (s 40-35(1)(a)) but contends that it is entitled to the input tax credits for the acquisitions relating to those supplies. 4 A supplier of goods and services is entitled to a credit for any "creditable acquisition": GST Act, s 11-20. An element of the definition of "creditable acquisition" in s 11-5 is that something was acquired "solely or partly for a creditable purpose". Section 11-15 defines "creditable purpose" as follows: (1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise. (2) However, you do not acquire the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be *input taxed; or (b) the acquisition is of a private or domestic nature. (3) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be *input taxed to the extent that the supply is made through an *enterprise, or a part of an enterprise, that you *carry on outside the indirect tax zone. (4) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be *input taxed if: (a) the only reason it would (apart from this subsection) be so treated is because it relates to making *financial supplies; and (b) you do not *exceed the financial acquisitions threshold. (5) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be *input taxed to the extent that: (a) the acquisition relates to making a *financial supply consisting of a borrowing (other than through a *deposit account you make available); and (b) the borrowing relates to you making supplies that are not input taxed. The structure of s 11-15 bears some similarity to the general business deductions provisions of the income tax law (HP Mercantile Pty Ltd v Commissioner of Taxation (2005) 143 FCR 553, 559-60 [21]) containing both a positive test and a negative, or blocking, provision (AXA Asia Pacific Holdings Ltd v Commissioner of Taxation (2008) 173 FCR 500, 522 [124]) although care must be taken not to apply the jurisprudence on the income tax provisions as if they were the same as s 11-15 of the GST Act. There are significant differences between them. 5 Rio Tinto contends that the proper application of s 11-15 of the GST Act entitles it to a credit to the full extent that its acquisitions related to the carrying on of its enterprise without denial of credit under s 11-15(2)(a). Her Honour rejected that submission holding that the direct and immediate connection between the acquisitions and the provision of the leased accommodation fully engaged s 11-15(2)(a) identifying the class of acquisitions excluded from allowance of a credit. 6 An acquisition which comes within the operation of s 11-15(2)(a) is excluded from the ambit of s 11-15(1). Unlike, perhaps, acquisitions coming within s 11-15(2)(b) (see Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47, 56 where exempt income and assessable income were described as "mutually exclusive categories") acquisitions governed by s 11-15(2)(a) may otherwise have been acquired for a creditable purpose within the meaning of s 11-15(1) and, to that extent, would overlap but for the effect of s 11-15(2): see also Macquarie Finance Ltd v Commissioner of Taxation (2005) 146 FCR 77, 106 [104] (French J). The effect of the exclusion or blocking provision (as it was described by Lindgren J in AXA Asia Pacific Holdings Ltd v Commissioner of Taxation (2008) 173 FCR 500, 522 [124]) is to exclude an acquisition to the extent that it relates to a supply that is input taxed from the ambit of "creditable purpose". In doing so the inquiry called for by s 11-15(2)(a) is not into whether something had been acquired in carrying on the enterprise (which would otherwise have acquired the thing for a creditable purpose within the meaning of s 11-15(1)) but, rather, irrespective of the extent to which the thing had been acquired in carrying on the enterprise, to what extent, if any, did the acquisition relate to making supplies that would be input taxed. The relationship to focus on, in other words, is the relationship between the antecedent acquisitions for which credit is claimed and the subsequent supply for which the credit is, in effect, lost. 7 The application of s 11-15(2)(a) requires, therefore, the precise identification of the relevant acquisition and a factual inquiry into the relationship between that acquisition and the making of supplies that would be input taxed. An acquisition will not be for a creditable purpose to the extent that the facts disclose that the acquisition relates to the making by the enterprise of supplies that would be input taxed. Some acquisitions may relate to the making of supplies that would be capable of distinct and separate apportionment as between an input taxed supply and an otherwise taxable supply. In that case it may be possible to divide the creditable purpose between the two. Other acquisitions may be indifferently both for supplies that would be both input taxed and otherwise taxable generally. In that case some fair and reasonable assessment of the extent of the relationship between the two may need to be made. But, as is the case here, an acquisition which relates wholly to the making of supplies that would be input taxed is not to be apportioned merely because that supply may also serve some broader commercial objective of the supplier. The contrary construction is neither required by the language of the provisions nor by its policy. It may, indeed, readily be assumed that many taxpayers will make supplies "that would be input taxed" as part of carrying on an enterprise. The construction urged by Rio Tinto, however, would prevent the operation of s 11-15(2)(a) in such cases. The words of the section do not say that and the policy of denying a credit for tax that would be input taxed militates against it. What the words require is that there be a factual identification of the acquisitions in question and a factual inquiry into the extent to which those acquisitions relate to the making of supplies that would be input taxed. The relevant inquiry called for by s 11-15(2)(a) is not into the relationship between the acquisition and the enterprise more broadly. An acquisition for purposes which are not distinct and severable or which does not relate to different supplies but which comes wholly within the blocking provision is excluded from the definition of creditable purpose. 8 An examination of the acquisitions here in question reveals unquestionably that they all relate wholly to the making of supplies that would be input taxed albeit that they do so for the wider purpose of the enterprise. The acquisitions need not all be set out, but some examples from the affidavits and exhibits of Mr Wildy will suffice as illustrations. Mr Wildy was the accommodation and towns manager of Rio Tinto. He described the acquisitions in his affidavit by reference to the exhibits as coming within four categories: (a) refurbishment, minor works, maintenance and repairs of residential housing; (b) cleaning, housekeeping, landscaping, grounds and pool maintenance; (c) mould removal, remediation and hygiene cleaning; and (d) construction and purchase of new housing. A consideration of the exhibits revealed that all of the acquisitions relate wholly to supplies that would be input taxed. They all wholly relate to the supply of premises by lease. It is no doubt true that the supply of the premises for lease was for the broader business purpose of carrying on the enterprise of which Rio Tinto is the GST representative member. That circumstance may explain why an acquisition (relating to a supply that would be input taxed) may have been made in carrying on the enterprise, but it does not alter the fact that the acquisitions in question all related to the making of the supply of the premises by way of lease. The terms of s 11-15(2)(a) do not depend upon the reason or purpose of the enterprise making the supply or making the anterior acquisition. The provision does not turn upon a characterisation of the purpose, or the occasion of the purpose, of the supplier but upon a characterisation of the extent to which the acquisition relates to the subsequent supply. The acquisitions in this case were not like undifferentiated general overhead outgoings (HP Mercantile, 563 [37]), which, although undifferentiated, related to different supplies, but were acquisitions of things which related wholly to the otherwise input taxed supply of residential premises, and could not relate to the broader purposes of the enterprise other than by the acquisitions relating to the otherwise input taxed supplies. The extent of the relationship between the acquisitions and the supply of the residential premises is not to be reduced by the fact that the acquisitions may also have related to another purpose where that other purpose is only related to the acquisition wholly by and through the otherwise input taxed supply. 9 Accordingly the appeal should be dismissed. I certify that the preceding nine (9) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Middleton, Logan and Pagone.